You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

See my pictures in Instagram, @teguhidx.

Welcoming ‘January Effect’

In the world of capital markets, 'January Effect' is a situation where stock prices increased significantly in the month of January. There are several things that could explain this phenomenon, like because the investor is usually fresher and more eager to buy stocks after a long holiday (Christmas and New Year), the beginning of a year is almost always fulfilled with optimism, and because companies usually pay dividends in the first half, precisely in April – June, so investors will have taken a position in the stock in question in advance, starting in January.

If compared with the phenomenon of 'Window Dressing', which are often mentioned towards the end of the year, the January Effect is more likely to occur. In the event Window Dressing in November – December, it is said that certain stocks will probably go up because some fund managers deliberately raise the price, so that the stocks looked good in their portfolios. If the theory is accurate, the Jakarta Composite Index (JCI) will surely rise in November –December, but in fact, you may check yourself, JCI more often to fall on those months. It may be true that some fund managers who manage billions of fund deliberately 'beautify' their portfolios by raising the price of the stocks that they hold, but still they will not be able to beat the current of the market, that if most of the investors decided to sell their stocks in December (and later go on holiday), then that’s it, the JCI will go down no matter what.

While in the January Effect, the people who involved in buying activities are not just particular fund managers, but almost all investors, and the result the JCI will go up. Based on my experience from 2009 to 2015, the stock index almost always rose significantly in January, and only fell in 2009 and 2011.

The question, how about January 2016? Will the JCI go up?

Statistically, JCI will usually rise in a given year if in the previous year it dropped. Unless there is a major crisis, only then the JCI could fell in two years in a row, as the years 1997 – 1998, and 2000 - 2001. But because the economy condition for 2015, though slowed down but can not be considered as crisis, then for the year 2016 as a whole, the JCI will likely to rise. However, in January itself there are a few things to note.

The first, in 2008, the national economy had been affected by the subprime mortgage crisis in the US, where not only the JCI that was dropped more than 50%, but the economic growth also fell down to 4.2% YoY, and the performance of listed companies becomes very poor. The JCI itself, after reaches its lowest point in November 2008, in the next few months it was still sideways until February 2009, including dropped in January 2009. Entering the month of March 2009, then JCI began to rise.. and continue to rise until it finally closed the year of 2009 with a gain record of 87.0% YoY.

Then why the index is still sluggish in early 2009, and only began to rise in March? Well, the most make senses theory is, it’s likely because in March, some listed companies on the Stock Exchange have started releasing their financial statements for the fourth quarter of 2008, and there are many of them who posted financial performance that far better than expected, especially the sectors of property, coal mines, and oil palm plantations. Especially for coal and CPO companies, their excellent performance continued in the coming quarters, in line with the increase in the price of coal and CPO. Between the years 2009 – 2011, the stocks of coal and CPO became the main driver of the hike in JCI.

And now, the condition for 2015 is actually not much different from 2008, when the economic growth is slowing down, and the average performance of listed companies until the third quarter is still bad (in 2013, the JCI was also down, but the economic growth at the time was not as slow as today). And if investors prefer to wait and see at the beginning of 2016, ie until the companies released their newest financial statements in March 2016, the phenomenon of 'January Fffect' will probably not going to happen, and the JCI will only rise in March, once again, if the general performance of the companies actually shows an improvement.

The good news is, the performance of the banking sector until the third quarter of 2015, in general have been better than the previous quarter (second quarter), and this is a signal of economic recovery, so let’s hope that companies in other sectors will follow.

Second, in early 2009, investors were treated by negative stories about the mortgage crisis in the US that had not been really recovered, including the Greek crisis. So although JCI eventually rose significantly in 2009, but in January – February it went down, and probably it is because the investors are still hesitant about the developments of the global issues at the time.

But for 2016, the conditions are very different: Please check the developed countries such as US, UK, Germany, including China: Nobody talks about crisis. The global economy experienced a slowdown in general, that’s true, but once again, nobody talks about crisis. When the Fed raised the Fed rate, it is also because Ms. Yellen considers that the American economy has recovered and is ready to receive a higher interest rate (more details about Fed Rate, read this article).

In conclusion, when considering the factor of global issues, the JCI is likely to rise in January, because the ‘optimism of the beginning of the year’ that approaches investors will not be distracted by frightening stories from abroad. About the stock-pick, you can check the stocks of banking, infrastructure, and property, because these sectors have a positive sentiment for 2016 related to the construction of infrastructure, etc., plus their financial performance was not that bad.

The logo Bank BRI (BBRI). With ROE of nearly 30% until the third quarter, BBRI is one of few large companies on the Indonesia Stock Exchange which still posted a slick financial performance in 2015.

But if the January Effect does not happen, then do not worry, because if the later financial statements of the companies really show an improved performance, then we as investors will experience a period of ‘honey moon’ that started in March, hopefully.

Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com

No comments: